Shareholder Activism and Changes in Audit Committee Composition
54 Pages Posted: 9 Sep 2018 Last revised: 14 Oct 2019
Date Written: September 2019
We examine whether governance related shareholder activism is associated with changes in audit committee composition. Audit committees are the “ultimate monitors” of firms’ financial reporting processes. The SEC is interested in whether audit committees have financial experts and prior research has documented benefits associated with accounting-specific financial expertise. Governance activism expresses investors’ dissatisfaction with corporate governance; audit committees are an important governance mechanism. Therefore, we predict that governance activism will affect audit committee composition. We document a positive association between governance activism – and specifically, accounting, audit, and financial reporting related governance activism – and increases in audit committee accounting-specific financial expertise. This association is strongest when a firm concurrently announces a restatement, experiences an internal control failure, or has low pre-activism expertise. Further, in the post period, there is a considerable drop in activism for firms that have added accounting experts. Our study documents an important determinant of audit committee composition.
Keywords: Shareholder Activism, Audit Committee, Corporate Governance
JEL Classification: G30, M41
Suggested Citation: Suggested Citation